How to Go Over the Fiscal Cliff and Still Avoid Recession

Create an Infrastructure Bank and Transition from a Wartime to a Peacetime Economy

The deal that Congress and the President made that created the so-called fiscal cliff may not be so bad after all. In fact it has many good elements: raising taxes on the rich which will reduce burgeoning inequality in the US, deficit reduction and reduction of the bloated military-industrial complex budget.

The one thing that many experts are worried about is that taking this much money out of the economy will create a recession. However, increased economic activity that would offset the fiscal cliff provisions can come about with increased leveraged spending on infrastructure development. A relatively small amount of government money when combined with money from private investors can goose the economy while preserving the good elements of the fiscal cliff deal.

This can lead to a conversion of what today is essentially a wartime economy to a peacetime economy and change the US from a national security state – one dependent on military related spending to create jobs – to a world leader in peacetime economic development.

It is important to realize that development of infrastructure in the US will set the stage for the revival of the economy. First class infrastructure will open up possibilities for the creation of 21st century businesses and enable them to thrive. It will also reduce carbon dioxide emissions and thus global warming.

President Obama backed the proposed legislation in February 2008 for the creation of an infrastructure bank. The bank would use the same methods as a commercial bank – that is fractional reserve banking. Fractional reserve banking allows banks to leverage depositor funds so that they can loan out ten times what their deposits are on the theory that not all depositors will want their money back at the same time.

In this way banks can make many more loans than they would be able to do otherwise. Obama suggested that the Bank would borrow $60 billion of federal funding to invest in infrastructure over 10 years, while leveraging “up to $500 billion” of private investment. So a relatively small amount of Federal funding could be leveraged up to provide a substantial amount of spending on infrastructure.

The logic behind the bank isn’t hard to grasp. In recent years, reams of white papers have come out describing how much of the nation’s transportation, water and energy infrastructure is in shambles. A 2010 Government Accountability Office report, for one, found that a quarter of the country’s 600,000 bridges are either “structurally deficient” or inadequate to today’s traffic needs.

The American Society of Civil Engineers (ASCE) estimates that an investment of $2.2 trillion is needed to bring America’s infrastructure up to snuff. The US lacks a central source of low-cost financing for big construction projects akin to the European Investment Bank.

The deal that created the fiscal cliff has many good aspects including the following:

Taxes are raised on everyone but disproportionably on the rich reducing inequality.

A lot of revenue is generated to pay down the deficit.

The military-industrial complex takes a big hit.

Social Security, Medicare, Medicaid and Veterans’ benefits are not affected.

There is a 5 to 1 ratio between revenues from taxes and savings from cuts.

The only downside to the deal crafted by politicians as a means of kicking the can down the road is that taking that much money out of the economy might cause a recession. But here’s a way to avoid that: create an infrastructure bank. My premise is that money needs to be taken away from the military-industrial complex establishment and spent on rebuilding infrastructure in the US.

In addition new infrastructure such as a smart electric and electronic grid, high speed rail and undergrounding and hardening of all utilities as a way to avoid widespread devastation from superstorms such as the recent Sandy is of paramount importance. Whether or not we go over the fiscal cliff, creation of an infrastructure bank should be part of any deal before or after January 1.

Here’s another way to do it: take some of the money from revenues generated by the fiscal cliff, about one tenth will do, and then, through the magic of fractional reserve banking, that money can be multiplied ten times. The government would make a deposit with savings generated by the fiscal cliff, and then investors would also be invited to make deposits. They would draw interest on those deposits. The bank’s sole dedicated purpose would be to loan out or grant money for infrastucture projects.

Those loans or grants would be made after due diligence on the requesting company’s business model for the infrastructure project it has in mind. These projects could be created by entrepreneurs or by the government itself. Some of these projects could be revenue producing such as toll roads; some could be public investments with interest paid to investors over a period of time.

Obama’s proposed Secretary of Business could oversee the infrastructure projects funded by the infrastructure bank to make sure that there is a cohesive vision for a national infrastructure model that made sense as a whole and not a collective hodge podge of unrelated projects that didn’t fit together or work together. The Secretary of Business could also oversee industrial policy in the US similar to Japan’s Ministry of Industrial Trade and Industry (MITI). MITI ran much of Japanese industrial policy, funding research and directing investment.

In 2001, its role was taken over by the newly created Ministry of Economy, Trade and Industry (METI). An industrial policy coupled with an infrastructure development policy could make the US better fit for not only nation building at home but place it on a better footing for international competition. At the same time infrastructure redevelopment would create hundreds of thousands of jobs thereby avoiding a recession and placing the economy on a sounder footing.

The US is lagging behind other countries in infrastructure development. While other countries have been pouring money into infrastructure, the US has been pouring money into its military-industrial complex. More money is spent on defense than is spent by the next ten highest defense spending nations combined.

For example the US ranks 29th among the world’s nations in internet speed behind such countries as Romania, Bulgaria and Latvia. We rank first only in price. We pay six to ten times as much as the French, for instance, for a triple play package (phone, cable TV and internet). The French internet is ten times faster downloading and twenty times faster uploading than what most Americans can buy.

Undergrounding of utilities is one much needed infrastructure project. According to a Morgan Stanley analysis, power outages, caused by trees falling on electric power lines cost the U.S. economy between $25 billion and $180 billion every year. In Germany there are hardly any power outages from storms because their lines are all underground. Other infrastructure projects that can be encouraged by intelligent government policies is the creation of and retrofitting of smart buildings.

In Germany architects have created buildings that have a net zero consumption of energy. This translates to fewer carbon emissions into the atmosphere – a good thing. There are over 50 passive houses and at least 100 units with ‘plus energy’ standard (houses which produce more energy than they need) in Vauban, a neighborhood of Freiburg, one of the largest ‘solar districts’ in Europe.

“Within Vauban, a new ecologically designed settlement of 2000 houses that is being built on the site of an abandoned French military base, a Solar Village – Europe’s most modern solar housing project – is being built at Schlierberg, with 50 solar houses that will produce more energy than they consume, designed by Rolf Disch, one of the most renowned solar architects in Europe. The brightly coloured terraced homes use only 15% of the energy that is needed by Freiburg’s low-energy homes, and need additional heat for only a few weeks a year, from a wood chips biomass combined heat and power (CHP) plant.”

“A district centre has been created at Vauban with shops, a primary school, kindergartens and public green spaces. Vauban has been designed to create a ‘district of short distances’ where the schools, farmer’s market, businesses, shopping centre, food coop, recreation areas and approximately 600 jobs will be within walking and cycling distance of residents.”

The US electric grid is also not performing at the same level it was decades ago. Energy losses in the transmission and distribution system nearly doubled from 5 percent in 1970 to 9.5 percent in 2001. There is also a considerable security risk in the design of the grid with centralized generation plants serving distant loads over long transmission lines.

A smart grid would consist of a network with distributed sources of electricity generation from many different types of sources. It would optimize asset utilization and operating efficiency. It would anticipate and respond to system disturbances in a self-healing manner. It would be resilient against physical and cyber attacks and natural disasters.

In summary, the importance of infrastructure development for the long term healing and soundness of the economy cannot be underestimated. The creation of an infrastructure bank as Obama has suggested would be a cost effective way to ward off a recession, leverage government money with private investment and put the US on a sound competitive footing vis a vis other countries of the world.

The provisions of the fiscal cliff provide for many good things, among them deficit reduction, raising taxes disproportionally on the rich and reduction of the Defense budget. It might also reduce economic activity leading to a recession unless another way can be found to stoke the economy and employ laid off defense workers. Many of them would welcome the opportunity of switching over to a job in the infrastructure-industrial complex.

Any deal Obama makes, whether before or after the fiscal cliff dive, should provide for infrastructure development, something that is sorely needed in the US both in terms of security from physical and cyber attack and from attacks from Mother Nature which are gearing up in ferocity. Obama may have only one chance to make any kind of grand bargain since the Republicans in Congress will probably be as intransigent and obstructive as they have shown themselves to be for the last four years. He better get it all done in one fell swoop.

John Lawrence

John Lawrence graduated from Georgia Tech, Stanford and University of California at San Diego. While at UCSD, he was one of the original writer/workers on the San Diego Free Press in the late 1960s. He founded the San Diego Jazz Society in 1984 which had grants from the San Diego Commission for Arts and Culture and presented both local and nationally known jazz artists. John received a Society of Professional Journalists, San Diego chapter, 2014 award. His website is Social Choice and Beyond which exemplifies his interest in Economic Democracy. His book is East West Synthesis. He also blogs at Will Blog For Food. He can be reached at j.c.lawrence@cox.net.

Infrastructure bank would need to be structured with some sort of oversight (NOT Congressional) assuring loans are to viable companies, closely monitored. It is unfortunate, in this land of the free, that many businesses view anything funded by the government, federal, state or local, as a license to steal. It seems to me that funding via an Infrastructure bank bypasses offering money to the states for infrastructure spending only to see it go to balancing inept state budgets instead.

It should be said that my latest soapbox is regarding the absurdity of federalism.

While I agree with your concerns about the military-industrial complex I don’t agree that now is the time to attempt a dismantling. There could be a loss of tens of thousands of jobs and we don’t need more unemployment at this time. The segue to “new” jobs would not occur overnight leaving us teetering on another recession.

If I had my druthers, the focus of a “grand deal” would be on the spending side, allowing the Bush tax cuts to expire unless Congress would accept the renewal of middle-class tax cuts. Personally I view the anti-Norquist strategy of letting the Bush tax cuts expire and THEN offering a middle-class tax cut as brilliant. Voting against a tax cut, of any kind, is easily viewed as voting for a tax increase. And, at this time, entitlements should NOT even be on the floor beneath the table! We have many current problems and entitlements are NOT a current problem!

All in all some very good ideas here. Alas, we don’t have a very good Congress to implement them. Hard lines by the POTUS are called for but they only work when you have a Congress interested in the “general welfare” of America. Currently that is not what we have.

Art Layman hits the nail on the head when he says we don’t have a Congress interested in the “general welfare”of America. In fact, we haven’t had that since Clinton’s presidency. Even Reagan couldn´t resist favoring the rich by reducing the 70% top marginal tax rate to 28% … which in concert with accelerated Defense spending caused the national debt to mushroom by $2 trillion or 182% during his 8-year term and also was the beginning of the income-wealth gap class warfare we have today.

That’s why Obama should stand resolute through December this year and not hesitate to let the “fiscal cliff” fall if Republicans do not accept returning the upper income marginal tax rate to 39.5% on household incomes above $250,000. The 39.5% upper income rate is ridiculously low compared to international standards. The Netherlands now has a marginal tax rate 0f 52% on household incomes above $100,000 and yet recently has been ranked the 5th most competitive country in the world. Similar high upper income tax rates exist in countries like Germany, Sweden, Norway, and Finland, and yet they too are very highly ranked from a competitive standpoint.

The Republicans consider the raising of upper tax rates as a non-starter but are open to discussing elimination of deductions for the wealthy. The problem here is that the amount of tax revenues that can be raised from 2% of Americans by limiting deductions is small relative to the magnitude of the revenues needed. Even letting the tax cuts for the wealthy and middle class end this year will not produce enough revenue to tame an accelerating national debt and re-energize the economy.

We need to reduce short and long term annual deficits by an average of at least $400 billion to bring recent unsustainable $1 trillion annual deficits back down to a $500 billion range or 3% of GDP vs. almost 8% now!

Obama’s plan calls for reducing deficits by $4 trillion or ± $320 billion annually — lower than ideally needed but perhaps correct for the short term. The $4 trillion comprises $1 trillion in mainly extending tax cuts for 98% of America and 97% of small businesses and restoring higher tax rates for the wealthy. The balance of $3 trillion are spending cuts that come in large part by counting already achieved cuts and further expected, but questionable, war savings from winding down military operations in Irag and Afghanistan.

However, additional revenue generation options are possible through serious tax code reform. This action could yield following conservatively stated revenues over the next decade:

These actions alone could add another $4 trillion in deficit reduction possibilities over the next ten years or ± $320 billion annually… providing real, meaningful debt reduction and funds to regenerate the economy by an Infrastructure Bank as you address so well, John.

But achieving sensible tax code reform and the related policy actions noted above will take much time, assuming it is at all possible. But as I´ve said often, any tax reform should come with legislation that sets reasonable but enforceable ceilings on annual deficit and debt levels … legislation that cannot be overturned or modified or otherwise nullified without a two-thirds majority vote of Congress.

Unfortunately, our dysfunctional governing process works against merging equitably the best and brightest of each party’s ideas in the common interest of all Americans. This inflexibility is illustrated in the anti-tax, anti-government drivel of lobbyist Grover Norquist, dedicated to making government smaller by starving it of revenues and the rich richer (including himself) by lowering corporate and top tax rates … ideological dogma frequently mouthed by followers like McConnell who made following remark in relation to the fiscal cliff negotiations now taking place:

“I’m not asking the president … to adopt our principles. I’m simply asking him to respect our principles by not insisting that we compromise them. Because we won’t.”

So much for the chances of constructive, cooperative governance! When will we ever learn? There are parallels here to the complete negotiating breakdown going on for 40 years now between Palestine and Israel … where parties set pre-conditions that obviously can’t be met.

Republican `moderates´ are history. They can’t compromise with Democrats. They can’t compromise with themselves. They have been selling their souls away to Grover Norquist’s “No Taxes Ever” pledge and to other special interests. An oath is given to a single lobbyist who says revenues are not the problem, government spending is the evil. But that oath takes precedence over an elected official’s Constitutional responsibility to debate and consider issues… to seek balanced, nuanced approaches to big societal problems. This is the dangerous political and polarized rut we are in today … promoted by the Norquists of our times who control elected officials but who are themselves unelected and thus unaccountable to the general public.

Given all this and much more, is it any wonder Obama has to hang tough for Mainstreet in the fiscal cliff negotiations. Republican `moderates´ are history!

To show just how incredibly conservatively I have estimated potential average annual US tax revenues recoverable under points above: (1) $100 billion, (2) $65 billion, and (4) $80 billion, research by the independent Tax Policy Center concludes that TOTAL US tax expenditures for the rich and corporations — including deductions, loopholes, capital gains, subsidies, exemptions, exclusions, credits, and deferrals — would cover well over 100% of CBO´s estimated 2013 fiscal year deficit of $612 billion assuming we go over the fiscal cliff !!

Well over $200 billion of revenue losses occur each year from $trillions of US money secretly concealed offshore untaxed in legally complex tax avoidance structures.

Thanks for your comments and insights. I think Obama has to go for a really big deal incorporating both increasing tax rates for the wealthy AND tax reform eliminating loopholes, subsidies etc. Especially the capital gains rate has to go back to where it was before the Bush tax cuts (30%) which will happen if nothing is done before January 1.

I think Obama will get one chance at a deal with Republicans either before or after January 1. He better go for broke. If he gets some sort of puny compromise, I for one will be very disappointed. The infrastructure bank or some sort of deal on infrastructure development should be an important part of the deal since HE PROBABLY WON’T GET ANOTHER CHANCE TO NEGOTIATE ANY KIND OF DEAL FOR HIS WHOLE SECOND TERM. That’s why this deal is so important.

And infrastructure is already collapsing everywhere. Look at what happened with Sandy because infrastructure had been neglected especially by the power and light companies. Power poles are supposed to be replaced every so often, but they don’t do it because it subtracts from profits, and so they break in heavy storms causing outages. Gas lines are corroding and that leads to a lot of gas explosions. Their whole philosophy is to neglect maintenace in order to increase short term profits.

Politicians have to risk their reputations and go all out. I just saw the movie “Lincoln” on Thanksgiving day. Everybody was against him including his own wife and son. Yet he stuck to his guns about freeing the slaves desite an enormous amount of pressure. If he could stand up to all that, surely Obama can stand up to Republicans when the stakes are nowhere as near as high. Even if there is another recession, it’s not the end of the world. Americans are such weenies! If they have to curtail their shopping a little, they act like it’s the end of the world.

If we can’t get our fiscal house in order now, when a President has nothing to lose except his purported legacy and the Bush tax cuts will expire for sure if he does nothing, when will we ever get our house in order until there is a complete collapse?

Obama’s legacy like Lincoln’s will be better served if he stands up and does the right thing: risk a recession if necessary, but put the nation on a more solid fiscal foundation.

You struck movingly the inspiring CAN DO American feeling I get whenever I watch the famous boxing comeback of “old Cinderella man” James Braddock when he defeated Max Baer after 15 rounds for the world light heavyweight championship in 1935 … in the Great Depression.

I’ll never forget those words shouted by one man in a huge but totally silent Madison Square Garden audience as Braddock entered the ring… “YOU CAN DO IT, JIMMY!” For the hope and comeback character you personify for those suffering in America’s roughest of times.

Yes, … “You Can Do It, Barack!” For a middle class going backward and a nation divided against itself.

Thanks for all your comments. I think that Obama will only get one chance to deal with the taxes/ military/ infrastructure/ everything else/ questions unless he plays chess instead of checkers and looks forward several moves. For instance, if, as others have suggested, he lets the fiscal cliff happen and then proposes a tax cut for 98% on January 1, how can Republicans oppose it? They’re for tax cuts, right? He can continue to harp on this for as long as it takes, meanwhile throwing in all the other things he wants to get done as bargaining chips. It would throw the Republicans back on their heels and force them to negotiate further on down the line. It would put the Republicans on defense and force concessions. Otherwise, they will never compromise on favorable terms to Obama’s agenda.

He needs a strategy for getting his agenda done, thought out well in advance and not reacting to every situation as if it were a one off. Chess instead of checkers.

Let us not get carried away with extreme ballyhooing. What Obama can accomplish by year-end or shortly thereafter is not likely to be Valhalla. He still has a House not much interested in accepting his solutions as viable. Like it or not, those House members also have a constituency they must maintain adherence to. No doubt a failing in our political system but reality nonetheless.

I realize that a great American past-time is to reflect on and borrow from words or actions of wisdom from history. Alas, this is not the 1860s nor the 1930s. While “You can do it” may be timeless the attendant circumstances are not.

Meaningful tax reform will be a long time coming and it should not be attempted in some sort of rush to enjoin a mandate. Let the Bush tax cuts expire then pass new middle-class tax cuts, then begin a review of tax expenditures, loopholes, etc. The ATM goes a long way to achieving what everyone, including Romney, suggests as a fix. The biggest problem is they never indexed it so each year they have to reset the income limits before it kicks in.

There are any number of options that could increase revenues by playing with tax deductions for various income levels and such but the possibility of producing an unfair result for many is great. One of my differences with Barack is the level of $250,000 triggering tax rate increases. $250,000 is a lot of money but it’s a helluva lot more in Podunk, Idaho than it is in New York City. If we begin tax reform at that same level many middle income workers will be hurt. I also do not support a Simpson-Bowles like approach where tax reform is marginalized or equalized by overall tax rate deductions. Even at Clinton era levels we do not have, overall, an oppressive income tax.

I do agree on capital gains taxes, although it was Clinton who reduced them from 30% to 20%, then Bush down to 15%. Have never understood the disconnect in our American theorem, that wealth comes from “hard work”, yet we have to give tax preferences to those earning money from money. To his credit, when Reagan made the stupid move in reducing the highest marginal tax rate to 28%, he did make cap gains taxable at ordinary rates, i.e., 28%.

I also find it perplexing that in order to get energy companies to begin putting power lines underground the federal government will probably have to fund it but a worthy goal is still a worthy goal. No doubt arguable that the users of power, all of us, would have to pay for it anyway.

Am somewhat struck by your cavalier attitude toward recession John. It’s not about having a few bucks more to spend. If somehow we could make a recession and unemployment distributed equally among all US earners your thoughts might be more palatable but we all know that recessions and unemployment are not suffered equally by all. Often it’s the least among us who are impacted the most. We also have to realize that in a global economy a recession in the largest economy in the world will have “trickle down” effects across the globe.

In a larger sense we, often part of the hapless American public, will find fault with whatever compromises Obama deems necessary to make, but we enjoy the luxury of being Monday Morning Quarterbacks screeching about what he should have done or shouldn’t have done without the inconvenience of having to sit in his chair and make the final deal.

One last thing: There is a possibility that if we apathetic liberals muster the same enthusiasm for the off-year elections we might give him a Democrat Congress in his last two years and thus more might be done in righting the US ship of state.

Regarding my “cavalier attitude towards recession” I did suggest a massive infrastructure project that would create jobs to replace the ones lost in the military-industrial complex. This would not only avoid a recession but, more importantly, put the US on a sounder footing all the way around. Without spending on infrastructure and soon, we are just waiting for the next gas main to burst, the next water main to burst, the next bridge to collapse, the next power outage from a super storm etc etc.

A sound financial footing is one thing; a sound nation wide footing is another. And there are a lot of components to GDP that are essentially sick. GDP growth at all costs is not worth it. Only sound GDP growth with positive components will make the nation stronger. And of course those at the very bottom should be taken care of with special programs – unemployment insurance, food stamps etc.

I advocate government spending on infrastructure to create jobs because I don’t think the private sector is going to do it – create jobs that is. Their goal is to ship the jobs out to places where the pay is less than a dollar an hour.

“Meaningful tax reform will be a long time coming and it should not be attempted in some sort of rush to enjoin a mandate. Let the Bush tax cuts expire, then pass new middle-class tax cuts, then begin a review of tax expenditures, loopholes, etc.”

Fully agree with Art on that conclusion as I feel you do also, John. Indeed, this means NOT bowing to the Republican orchestrated disaster scenarios of going over the fiscal cliff. There is time in 2013, with minimum economic damage I believe, to fairly and pragmatically reach consensus on near and longer term fundamental change benefiting all Americans embracing: progressive tax increases, reductions in federal spending, removal of tax expenditures and tax avoidance loopholes to make our nation’s financial base structurally sound over a 5-10 year year period.

This is especially promising in combination with gradual substantial reductions in our horrendus $55 billion a month trade deficits (and resultant sky-high debt obligation to China) by resurrecting our manufacturing base and by getting serious on converting to green energy as Germany is doing. Meanwhile, there’s the Catch 22 of being now driven to exploit high CO2 polluting reserves of shale oil, coal, and the less polluting reserves of natural gas … all US energy sources in untapped abundance.

As I have mentioned, tax reform will take much time, including agreeing on legislation to have a balanced budget and to control debt levels along acceptable lines, e.g., as a % of GDP. It needs to be said that Republicans have been the most forward party about advocating tax reform. Unfortunately, they have some destructive ulterior motives. They approach tax reform as a way to sharply reduce spending AND taxes to make government much smaller. The truth is that government size in terms of spending levels has been almost the same under both Democrat and Republican administrations since WW II … with Republican administrations somewhat on the higher side due to tendency of Republicans to see and/or invent enemies everywhere (witness Romney suggesting Russia is the new enemy) as a rational to accelerate total Defense spending to obscene, unsustainable levels.

As Grover Norquest slyly says, “The problem is not that the PEASANTS aren´t sending enough money to Washington, the problem is spending.” (except on Defense, of course).

And when spending is cut — mostly for the powerless, e.g., cut Pell grants, dismantle FEMA, let roads and bridges continue to crumble, cut food stamps, social nets, etc. — and tax expenditures are eliminated, this opens the door for drastic across the board tax cuts. Welcome to democracy by market-driven “corporatocracy” and “supply side economics” … a fools’ societal dynamic that has gotten us into our prolonged mini-depression.

The American “Can DO” traditional spirit of change by sound government and market forces for the common good is still at the heart of our society in this modern time and, I believe, is considered axiomatic by most of our citizens.

The call for an Obama Can Do spirit — of goverance of, by, and for the people — is a hopeful challenge that we are not inexorably destined or determined to be fatally flawed in policies such as : adhering to the same Reagan/Bush II “Trickle Down” junk economics, downplaying climate change as not real, resisting regulation of private financial institutions, expanding income-wealth inequality, reducing the level of opportunity, creating social alienation and divisiveness in a society of haves and have-nots.

Obama needs to take personal responsibility in a Can-Do and Stand-up committment for all Americans in the fiscal cliff negotiations … to promote societal well-being broadly understood — a quality de facto absent within the political far right and their monied interests.